Fiscal Fallout: How to fix the hole in public finances – and in our public service model

This week the 2020 Public Services Hub at the RSA and the Social Market Foundation (SMF) launched a new report on the scale of the challenge for public finances ahead of this year’s Autumn Statement, and what this will mean for public services. The figures, based on Office for Budget Responsibility (OBR) projections and analysis by the SMF, suggest that an additional £48bn of tax rises or spending cuts will need to be made by 2017-18 in order for the Coalition Government to meet its aim of eliminating the structural deficit within five years.

The implications for public services are grim. If health, education and international development continue to be protected, we are looking at cuts of 23 per cent across remaining government departments – on top of the cuts that were already planned by 2014-15. For the Department for Work and Pensions, this would be the equivalent of cutting half of its spending on Job Centre Plus and all employment programmes.

In the report, 2020PSH argues that we need a new approach to public services to meet the challenges ahead. The pressures on public finances will remain even when there is a return to economic growth, as a result of an ageing population and rising demand for services. 2020PSH argues that more strategic spending, rather than unsustainable cuts and short term fixes, can alleviate these. We need real devolution of power from Whitehall to localities, alongside a serious attempt to manage demand for public services and smarter use of public spending and commissioning processes to catalyse social and economic growth. Legitimacy and consent are vital – without effectively engaging with citizens, policy changes on this scale are not possible.

A further three key points emerged from the event’s public launch at the RSA, at which the report authors were joined by public service veteran Lord Michael Bichard:

1. The scale of the challenge ahead has been understated. The dire state of current and medium-term public finances is troubling enough, but the long-term pressures of rising demand are even more serious. Lord Bichard argued that we are not taking this challenge seriously enough and are ignoring the “gaping hole” in the current public service model. There needs to be a far more serious effort at reconfiguring services around early intervention and prevention. We should be managing demand by creating services that strengthen the self-help capacity of citizens: not a smokescreen for cuts, as this has been interpreted, but to enable individuals and communities to take greater control of their lives and meet their personal and collective aspirations. The funding model for services also needs to be transformed, so that social investment and the mobilisation of new forms of social and economic resource are part of a new, more diversified spending model.

2. Localism and social equality can go hand in hand. One question raised in the audience discussion was whether centralism stifles local attempts to address the big issues facing communities. The argument runs that because local councils are assessed based on centrally-set targets, they are less accountable and responsive to local need.

Yet the central-local debate is often focused on the trade-off between localism and equality. There is an explicit or tacit assumption that greater devolution would produce unequal outcomes between different places – the ‘postcode lottery’ effect.

Instead, and as Lord Bichard and Ben Lucas both argued, perhaps the centre should give local government the capability to focus on issues such as inequality and economic stagnation that matter to local people, and which centrally set policies do not effectively address.

3. What type of growth is desirable? What was arguably missing from the discussion was the ecological component of future challenges. Everyone agreed that a return to economic growth was desirable, but there was no discussion of what type of growth this should be. It is clear that traditional consumption-based GDP growth is environmentally and socially unsustainable. To consider the long-term future of public services in the UK, we need to address the viability of the economic model which underlies them.

For this reason, 2020PSH’s argument for an integrated fiscal, economic and public service reform strategy is crucial. It highlights the need to think about growth not for its own sake, but in terms of how it can support and respond to the aspirations of citizens and the needs of society. We make this point in more detail in 2020PSH’s Business, Society and Public Servicesreport on the productive potential of collaboration between businesses, public service providers and civil society.

As the fiscal outlook worsens and our policy options narrow, it is vital that we explore these issues now.

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